facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck


I’m writing today about historical rates of return and how we perceive them. Let’s take a fictitious person Jean – who in late October tells her friend Wendy that she reviewed her Q3 statement and the 5-year return was 9.12%. Wendy is impressed, she doesn’t get a quarterly statement, only semi-annual, and tells Jean she will look at her return in the year-end statement in mid-January and report back. Wendy receives her Q4 statement and is disappointed, her return is 5.84% and asks Jean for the name of her financial advisor.

When Jean received her statement and the 5-year rate of return showed 9.12%, she pictured consistent and persistent growth in her portfolio. Wendy also pictured a consistent growth experience, only lower, substantially lower – by about one third.

Now for the reality of this short story – Jean and Wendy own the identical portfolio. Wait a minute – how can they have the same portfolio and have a 5 year return so drastically different? The answer is simple: Jean’s 5-year return was reported at the end of Q3 (Sept.30) and Wendy’s the end of Q4 (Dec.31).  This raises an important question:  can the same portfolio have such a different 5-year return from one statement to the next?  The answer – absolutely.

We recently went through a period market volatility and the December statements ran during a market downturn.  Many portfolios would have experienced a -10 to -15% decline in just December, while the S&P500 dropped a total of 20% during the 4th quarter of 2018.  I studied the 5 year returns for a client of mine from this past September through March, here they are:

Sept 30, 2018 – 9.12% …correspondingly the Market Peak or high point for 2018

Oct 31 – 7.19%

Nov 30 – 7.30%

Dec 31 – 5.84%…. correspondingly the Market Trough or low point for 2018.

Jan 31, 2019 – 6.77%

Feb 28 – 6.77%

Mar 31 – 6.87%

Do the September and December end numbers look familiar?  It’s interesting to note how much of a difference recent performance or the performance from the start of the period influences the 5-year return.

Let’s look at a simple numerical example to illustrate the impact of return on varying rolling time periods. Assume you invest $100,000 on the following date in an equity portfolio and the portfolio is valued as follows:

Initial Investment      Date                          Value                        5 -Year Return

$100,000                      Dec.1, 2014               $100,000

Dec.31, 2014             $100,000

Nov.30, 2018             $150.000                   8.45%

Dec/31. 2018             $120,000                   3.71%

What we see here is a portfolio that starts at $100,000, earns a 0% return in the first month, subsequently grows $50,000 over the following 59 months (to Nov 30) and then drops 20% in the 61st month (Dec 2018).

Most of us would look at the first 5-year period and think: 8.45% is pretty good, I must have earned a reasonably consistent return over the last 5 years.   Alternatively, we might see the 5-year return of 3.71% – and we would likely think we’ve had a persistently poor, long term investment return. Yet – it’s the same portfolio with 5-year return numbers separated by 1 month.  If two people owned the exact same portfolio in this example but one invested on December 1st, the other January 1st, they had the exact same experience, yet the first 60 months for each investor would have a 5-year return number differing by almost 5%.

The moral of the story?  Sometimes there’s more behind the numbers.  It’s always better to investigate and understand the data before jumping to conclusions.  It’s also important to understand that a rate of return calculation is simply an understanding of how a particular investment has behaved over a very specific period of time.